How to price your product or service

Costs of your product or service

The costs can be devided into three parts:

• costs for your and any employees' work with the product or service
• the material costs of the product or service
• other costs in the company

Labour costs

All of the work in the company may not be done directly with the product being produced, some time may be spent on administration or other work. When you calculate the labour cost for the product or service, you need to count the time that you actually work directly with the product or service in question.

Material costs

If you don't know exactly how much material costs you have for each product or service, you can calculate the total annual cost of all the materials you use. Then you divide the annual cost by the number of products or services rendered that you can charge for during a year.

Other costs 

The company probably has other costs, which cannot be directly linked to the product or service. Such as rent and costs for cleaning, machinery, insurance and other things that are needed. You can add up the other costs per year to get a total.

Total costs

After adding up your labour costs, material costs and other costs per year, you divide them by the number of products you produce or services you provide each year. Now you have worked out the manufacturing cost for each product or service.

Research the market

It is good to get an idea of ​​how much the cost is for what you are selling. But there are more you need to think about when you add the margin that creates your profit. For example, what your customers are willing to pay and what the competitors charge for their corresponding products or services.

To find out what customers think is a fair price, you can perform market surveys before starting your business. By asking potential customers questions, it is possible to form an idea of ​​what they pay today or would consider paying you. You can start by asking in the closest circle of acquaintances and then widen the circle to different networks you belong to.

A good idea in general is to learn your industry and think about the strengths and weaknesses of other players. For example, by looking at their websites, you can not only find out what price they charge, you can also see if they have different ways of charging.

Learn the industry

Different pricing models

For example, if you are a consultant and want to charge for your time, there are several different ways to do it. You can charge by the hour and have a pure hourly billing that you invoice every month. It is also possible to sell a time bank and let the customer have a number of hours that they can withdraw over the course of, for example, a year. An advantage is that you have secured your income for some time in the future when you write such an agreement.

A fixed price can mean that the customer pays for a service performed, but also that it signs a subscription to have services performed for, for example, a month. With efficiencies in the business, you can improve how long you need to spend on the services you perform. If you manage to do the same work in less time, you increase your profitability with this pricing model.

Price cuts have consequences

Try to be careful with price reductions, because a fairly small reduction in price means that you have to increase the volume significantly to reach the same profit. If you lower the price by 20 per cent, you need to sell a lot more than 20 per cent more to make the same profit. Always do a careful calculation before you decide to lower the price.